This past week, I was in Shanghai, China and found the price of a bottle of Evian and Fiji water about ten times the prices of local bottled water (Nestle). And when I went into the Beer section, the water was still twice the price of a Budweiser beer (produced locally). You can also buy Coke or Gatorade much cheaper.
The prices above are in Chinese Yuan (1 CYN = 0.15 USD), with the US Dollar equivalent being just under $2.00 US for the Evian or Fuji water, and then only 21 cents US for the Nestle water. The Budweiser is only $1 USD and the Coke is about 50 cents US. Given any worries about “don’t drink the water”, you might easily be willing to pay for the Evian. Or just grab a few Budweiser’s and not worry so much about the water.
China is in a state of dramatic change
The economy of China has been going through vast changes and you see it live on the streets of Shanghai. The contrast of the modern sky scrappers of downtown Shanghai, with the small street neighborhoods with laundry hung out on the phone lines. The increasing number of Mercedes driving past old school three wheel bikes carrying layer upon layer of boxes for delivery. High end restaurants contrasting against live chickens being killed and bagged for dinner that night. The small boutique 100 square foot stores and the 80,000 square foot Carrefour Super Markets.
While China has benefited from global trade, making Apple computers and Nike shoes to be sold around the world, the government uses protectionist practices to ensure high transfer pricing to ensure local goods benefit.
A brand like Evian, with water from the French Alps can not maintain that positioning if they begin producing in a factory just outside Shanghai. In the Carrefour, they have three specific aisles for “Imported” goods, all recognizable Western brands, but all with dramatic price premiums to the local products. This aisle might appeal to the high number of expats living in China as well as the growing Chinese upper middle class. The rest of the grocery store has 10-20% global brands interwoven among the shelves of local goods. This sets up two specific strategies, produce locally (for instance Nestle) and compete directly with the local goods, or stay in the “Imported” and use the super-premium pricing as a strategy to set yourself apart.
I remember being in France in the early 1990s, where I found myself walking all over Paris for about 4-5 hours on a 35 Celsius day. I finally came across a store selling Diet Coke and it was the equivalent of $6. I was in shock, but my thirst overcame my Scottish blood and I guzzled down the most expensive Diet Coke of my life. Later on, my wife ordered a glass of wine for $3. One more reminder that if you eat and drink like the locals, you will be much better off.
Global Pricing Management Systems
Global pricing models get very complicated. With a desire to do well in every local market, you must consider regional and global pricing to ensure you avoid any grey-market activity. Most of the big global brands are using pricing corridors by region to ensure local pricing stays local. Here are five things when considering your pricing as you enter new markets.
- Define your Pricing Strategy in alignment with your business strategy and business objectives and based on a deep understanding of your own competitive position, customer insight and cost-to-serve. When starting to look at your pricing, here is what you should be considering.
- Market Price: If you are confused, pricing studies that look at various options to identify the price elasticity. In general, the more loved a brand, a combination of interesting or important are more price inelastic. One water scare and Evian could charge $5 per bottle, without seeing a change in the volume would make it an inelastic price.
- Value Price: A brand has good value if the price is deemed “fair”. For a marketer, the mid point hits when the perceived price and perceived value match up. If the price is too high, there is a risk of losing customers/volume. If the price is too low, there is a risk of not realizing the full profitability on the brand.
- Strategic Price: the pricing strategy can actually impact the positioning as much as it just reflects the positioning. A super premium brand like Evian can make the consumer believe it must be a super premium if it really can command that value.
- Short vs. Long-term Revenue Pricing: Marketers can get caught up in the addiction to pricing promotions. Once you get up to 30-50% sold on deal, the actual price begins to have little meaning for the consumer.
- Portfolio Pricing (Price Points): One option for a brand entering a local market who wants to maintain the price of their global brand would be to create a specific local brand with a local price. This would allow you to own both the super-premium and the value priced brands, with the consumer never knowing you own them both.
- Operationalize Pricing Strategy in marketing activities and generate all required input for Price Execution. Here are the factors you should be considering when you operationalize your pricing into the new markets.
- Competitor Responses
- Not-in-Kind (NIK) Replacements
- Reduce/Increase attractiveness of business
- Keep out competition
- Setting Visible Market prices
- Customer Reaction Product Pricing Cannibalization
- Implement Pricing Strategy and Price Determination framework into daily sales activities and transactional processing. As you evaluate the impact of your pricing in the market, here are the factors you should be looking at.
- Buying Power
- Supplier Power
- Place in the Value Chain
- Price Elasticity
- Global vs. Local Supply and Demand
- Substitute products
- Define pricing capabilities and skill sets, establish pricing organization and assure consideration of legal requirements
- Enable pricing capability by monitoring and provision of tools, systems and processes related to pricing in an integrated manner
It is good discipline for brands to map out and manage their pricing waterfall. This provides a good control tool as you can track the waterfall over time and identify problems you are encountering. Here’s an example of the dimension involved in a pricing waterfall, helping move you from a desired price to a profitable price.
So would you pay a 90% price premium for the Evian? I did.
Here’s a presentation we use for the deep dive analytical thinking that can help you determine your pricing.
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